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Profitability of state-owned banks in the current financial year will be 30-40% lower than last year, owing to elevated levels of non-performing assets (NPAs), high provisions, lower margins and weaker fee based income, says ICRA, an Indian rating agency. This is likely to translate into a drop in return on equity to 6-8% from 9.7% in H1, FY2014, for public sector banks, ICRA said in a report on performance of 41 Indian banks in the July-September quarter. The report looked at the earnings of 20 nationalised banks, six of the State Bank group and 15 private banks.

ICRA estimates asset quality pressures will continue to remain high for public sector banks, forcing gross NPA levels to rise to 4.8-5% by March, as compared with 4.5% on Septe-mber 30. For the entire banking system, it expects gross NPAs at 4.2-4.4% levels, as against 4% at the second quarters end.